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Update: The Trump Administration and U.S. Tax Reform

Update: The Trump Administration and U.S. Tax Reform

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U.S. Treasury Secretary Mnuchin and National Economic Council Director Gary Cohn announced Wednesday, 26 April at a White House press conference what they called the “core principles” of President Donald Trump’s plan for tax reform and simplification. They said the administration is working with the U.S. Congress on details and on turning the plan into legislation, with the goal of moving as quickly as possible.

The White House has not yet posted an official document summarizing its principles for tax reform.

Overview

According to Director Cohn, President Trump is making tax reform a priority and is proposing the most significant tax legislation since the Tax Reform Act of 1986 and “one of the biggest tax cuts in American history.” Secretary Mnuchin indicated that tax reform would pay for itself with a combination of economic growth, reducing deductions, and closing loopholes.

Director Cohn and Secretary Mnuchin did not say whether the President’s plan might include a proposal similar to the border adjustment tax in the House Republican blueprint that was released in June 2016 (the “House Blueprint”). Further, although they mentioned eliminating business tax breaks for special interests, they did not identify specific provisions the administration might be considering in this regard. They also did not reference using tax law changes to fund infrastructure.

Individual tax proposals

Director Cohn indicated that the President proposes to:

Reduce the number of individual income tax brackets from seven to three, resulting in 10%, 25%, and 35% brackets;

Repeal the estate tax (which Secretary Mnuchin indicated, in response to a question, could happen immediately, rather than being phased in);

Eliminate all itemized deductions, except the mortgage interest and charitable contribution deductions; and

Provide tax relief to help families with child and dependent care expenses.

Business tax proposals

Secretary Mnuchin explained that the President proposes to:

Lower the income tax rate on corporations, as well as on pass-through entities that are “small” or “medium” in size, to 15% (with an unspecified mechanism to be discussed with Congress to address concerns that some individuals might attempt to use pass-throughs as a mechanism to avoid paying the properly applicable individual tax rate);

Move from a worldwide to a territorial tax system;

Impose a one-time tax on existing overseas profits (with the rate to be determined in consultation with the U.S. Congress); and

Eliminate tax breaks for “special interests”.

Key Observations

Many details, such as the tax rate for repatriated non-U.S. earnings, have been left open to future discussions with Congress, resulting in less clarity on the prospect of tax reform being passed this year.

The border adjustment tax (“BAT”) proposed last year under the House Blueprint is noticeably absent from the President’s outlined tax principles, indicating that the President may not support the BAT in its current form.

Both the House Blueprint and the President propose, among other things, a significant U.S. corporate income tax rate reduction and a one-time repatriation tax. Clients should consider analyzing the impact of and planning for these common proposals